Yong Yu and Chao Qun Restaurant Group, LLC v. Chao-Qun Lu

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-22-00036-CV
Yong Yu and Chao Qun Restaurant Group, LLC, Appellants
v.
Chao-Qun Lu, Appellee
FROM THE 455TH DISTRICT COURT OF TRAVIS COUNTY
NO. D-1-GN-21-006966, THE HONORABLE MAYA GUERRA GAMBLE, JUDGE PRESIDING
MEMORANDUM OPINION
In this interlocutory appeal, Yong Yu (Yu) and Chao Qun Restaurant Group, LLC
(the Company) challenge the trial court’s order denying their motion to compel arbitration of
their respective claims against Chao-Qun Lu (Lu) arising from disputes related to loans to,
ownership interests in, and management of the Company. See Tex. Civ. Prac. & Rem. Code
§§ 51.014(a) (listing appealable interlocutory orders), 171.098(a)(1) (allowing interlocutory
appeals from orders denying motions to compel arbitration). For the following reasons, we
reverse the order denying the motion to compel arbitration and remand for further proceedings
consistent with this opinion.
BACKGROUND
Prior to the events giving rise to this lawsuit, Lu was the managing member of the
Company, which owns commercial real estate (the Property) on North Lamar Boulevard in
Austin and rents out space in the Property to commercial tenants, including a restaurant owned
and operated by Chang Le Restaurant, LLC (the Restaurant). When the Company encountered
financial difficulties and was at risk of foreclosure by its lenders, it solicited assistance from Yu,
who agreed to lend funds to the Company pursuant to a promissory note. The note recited that
upon Yu’s satisfactorily completing “his due diligence” in connection with the Company’s
business, the parties would enter into a “subscription agreement” or similar instrument whereby
he would acquire 65% of the Company’s membership interests. Within two months of Lu’s
execution of the promissory note on behalf of the Company, the parties executed several
other agreements, including the following two relevant to this appeal: (1) a “Membership
Purchase Agreement” (Purchase Agreement), by which Yu agreed to purchase from Lu a 65%
interest in the Company, and (2) a “First Amended and Restated Operating Agreement of . . .
[the Company]” (Operating Agreement), both executed May 14, 2021.
After disputes arose among the parties to this appeal and third parties about debt
obligations, lease payments, ownership of the Company, and whether Yu paid the consideration
required by the Purchase Agreement—including whether any of his loan funds converted into
ownership interests in the Company—Yu and the Company filed the underlying lawsuit. In
the live petition, Yu made claims against Lu for fraud, fraudulent inducement, and negligent
misrepresentation and sought a declaratory judgment that he owns a 65% interest in the
Company and is its sole manager. The Company made claims against Lu for breach of fiduciary
duty and of the Operating Agreement.1 Appellants’ live petition included requests for a
temporary restraining order and injunction to enjoin defendants’ conduct that might interfere
with the Company’s operations.
1
The Company made claims against the two other individuals and the Restaurant, but we
need not recite those details because they are not relevant to the issues on appeal.
2
About a week after filing their lawsuit, appellants filed a motion to compel
mediation and arbitration as to their claims against Lu only. In their motion, they contended that
the Operating Agreement contains a binding agreement to arbitrate “all disputes of any kind
between the parties, arising out of or relating in any way to the” Operating Agreement.
Appellants alleged in their motion that Yu and Lu executed “numerous documents assigning
Yu 65% of the Membership Interests of [the Company]” and that Lu “accept[ed] the significant
benefits of consideration paid by Yu” and “specifically acknowledge[ed] ‘the receipt and
sufficiency’ of Yu’s consideration.” Nonetheless, appellants alleged, six months after execution
of the Operating Agreement and related Purchase Agreement, Lu “sent demand disputing Yu’s
ownership” in the Company.
On December 22, 2021, the trial court conducted a hearing on appellants’ motion.
Yu testified and the trial court admitted into evidence copies of the Purchase Agreement, the
Operating Agreement, and correspondence from Lu’s attorney to Yu’s attorney stating that Yu
had breached the Purchase Agreement by failing to pay the consideration outlined therein.
Following the hearing, the trial court signed an order denying appellants’ motion to compel
mediation and arbitration without stating its reasons. This interlocutory appeal followed.
DISCUSSION
A party seeking to compel arbitration must prove the existence of a valid
agreement to arbitrate and that the disputed claims are within the scope of that agreement. See
G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 519 (Tex. 2015). We resolve
these questions by applying “common principles of general contract law to determine the parties’
intent.” Id. at 520 n.15; see also Wagner v. Apache Corp., 627 S.W.3d 277, 283 (Tex. 2021)
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(“Arbitration agreements are on equal footing with other contracts and must be enforced
according to their terms.”). After a court determines that a valid agreement to arbitrate exists, it
should resolve any doubts as to an agreement’s scope in favor of arbitration. See In re Poly-
America, L.P., 262 S.W.3d 337, 348 (Tex. 2008). If a party proves that the disputed claims are
within the scope of a valid agreement to arbitrate, the burden shifts to the opposing party to set
up an affirmative defense to arbitration. Bonsmara Nat. Beef Co. v. Hart of Tex. Cattle Feeders,
LLC, 603 S.W.3d 385, 397–98 (Tex. 2020).
We review the denial of a motion to compel arbitration for an abuse of discretion,
reviewing legal questions de novo. Henry v. Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018).
The validity and scope of an arbitration agreement are legal questions that we review de novo.
Wagner, 627 S.W.3d at 283.
Appellants contend that the trial court abused its discretion in denying their
motion to compel arbitration because, although the Purchase Agreement does not contain an
arbitration provision, the Operating Agreement does, and the two agreements constitute “one
entire agreement.” Therefore, appellants’ argument continues, the arbitration provision in the
Operating Agreement applies to all their claims asserted against Lu, which fall within the
provision’s scope. We agree.
Pursuant to the Purchase Agreement, which Yu signed as “Purchaser” and
Lu signed as “Seller,” Lu agreed to sell and assign to Yu a 65% membership interest in the
Company for $400,000. “[U]pon such sale and assignment pursuant to an Assignment of
Membership Interests in the form of Exhibit A attached hereto,” Yu would “become the Manager
and a Member holding the Majority Membership Interest [65%] in the Company set forth” in
Schedule A of the Operating Agreement. In Article VII, the Purchase Agreement provides,
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This Agreement, including the exhibits, schedules hereto, and the Operating
Agreement, embody the entire agreement and understanding of the parties hereto
in respect of the subject matter hereof and supersede all prior agreements,
representations, warranties, and understandings between or among the parties,
whether written or oral, with respect to such subject matter.
(Emphases added.) Article VII also provides that each party
irrevocably agrees that any legal action or proceeding arising out of or relating to
this Agreement or for the recognition and enforcement of any judgment in respect
hereof brought by the other party or its successors or assigns shall be brought in
the courts of the State of Texas, County of Travis, or . . . the United States District
Court for the Western District of Texas.
As for the Operating Agreement, Lu and Yu each signed it in their respective
capacities as members, and Yu additionally signed it in his capacity as the Company’s manager:
“The undersigned hereby assents to his election as manager of the” Company. The Operating
Agreement incorporates by reference a “Schedule A,” which identifies Yu and Lu as the
Company’s only members with, respectively, 65% and 35% ownership interests. Of particular
relevance to this appeal, in Article X the Operating Agreement provides,
The Manager(s), Members, and any other party affected hereby, agree to negotiate
in good faith in an effort to informally resolve any dispute arising out of or related
to this Agreement that may arise between the Manager(s), Members, and any
other party affected hereby. If the dispute cannot be resolved by informal
negotiation, the parties agree to proceed to mediation in Austin, Travis County. If
the dispute cannot be resolved by mediation within thirty (30) [sic] after such
dispute is mediated, the parties agree that all disputes of any kind between the
parties, arising out of or relating in any way to the Agreement shall then be
subject to BINDING ARBITRATION pursuant to the Commercial Arbitration
Rules of the American Arbitration Association (“AAA”).
(Emphasis added.)
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In construing contracts, we consider the entire writing in an effort to harmonize
and give effect to all the provisions of the contract so that none will be rendered meaningless.
J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). Also, when, as here, separate
instruments are executed contemporaneously by the same parties, for the same purposes, and as
part of the same transaction, we construe them together. See Kirby Highland Lakes Surgery Ctr.,
L.L.P. v. Kirby, 183 S.W.3d 891, 900 (Tex. App.—Austin 2006, no pet.). When one of such
agreements that is “essential” to the overall transaction contains an arbitration provision but the
other agreement does not, we will presume that the parties intended the arbitration provision
to reach all aspects of the transaction unless there is a “contrary expression of intent.” See id.
at 901 (quoting Personal Sec. & Safety Sys., Inc. v. Motorola, Inc., 297 F.3d 388, 395 (5th Cir.
2002)). Here, not only do the subject matters recited in the Purchase Agreement and Operating
Agreement reveal that they are part of the same overall transaction, but the Purchase Agreement
expressly states that it and the Operating Agreement, together, constitute the “entire agreement.”
Furthermore, the Operating Agreement—governing relations among the Company’s members
and the Company’s operations—is essential to the overall transaction the parties structured to
facilitate Yu becoming the majority owner and sole manager of the Company through his
purchase of such ownership interest.
While Lu points to the provision in Article VII of the Purchase Agreement
requiring “any legal action or proceeding arising out of or relating to this Agreement or for the
recognition and enforcement of any judgment in respect hereof” to be brought in the courts of
Travis County or the Western District of Texas, such provision can be harmonized with the
broad arbitration provision in the Operating Agreement by construing it to mean that it applies
only in the event of a non-arbitrable dispute that must be litigated in court or, for instance, a
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party’s attempt to enforce an arbitration award. See Kirby, 183 S.W.3d at 901 (concluding
similarly where one agreement as part of overall transaction contained similar forum provision
and another agreement contained similar arbitration provision). Also, notably, the Article VII
provision in the Purchase Agreement refers to “any legal action or proceeding arising out of or
relating” to the agreement whereas the arbitration provision in the Operating Agreement refers to
“all disputes arising out of or relating in any way” to the agreement. “Disputes” is a broader and
more all-encompassing term than the specific term “legal action,” supporting the conclusion that
the parties intended that all disputes related to the agreements be resolved via arbitration while
only non-arbitrable legal actions be brought in the specified courts. Cf. Pinto Tech. Ventures,
L.P. v. Sheldon, 526 S.W.3d 428, 439 (Tex. 2017) (“When a forum-selection clause encompasses
all ‘disputes’ ‘arising out of’ the agreement, instead of ‘claims,’ its scope is necessarily broader
than claims based solely on rights originating exclusively from the contract.”). We, accordingly,
conclude that there is a valid agreement requiring the parties to arbitrate “all disputes arising out
of or relating in any way to” the Purchase Agreement and Operating Agreement.
Lu counters that as part of their burden to prove the existence of a valid
arbitration agreement, appellants had the burden of proving that “all conditions precedent” to the
Operating Agreement’s “taking effect” had occurred but that appellants did not—and could
not—so prove because the evidence conclusively established that Yu had not paid the
consideration as required by the closing provision in the Purchase Agreement.2 Lu relies on the
following provision in Article 2.1 of the Purchase Agreement to support his argument that Yu’s
2
We take no position on whether the evidence conclusively established Yu’s payment of
consideration or failure of such payment, as we are able to resolve the issues on appeal on the
basis of legal determinations.
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payment of the $400,000 consideration was a condition precedent to the Operating Agreement’s
becoming effective:
After giving effect to the sale and purchase under Section 2.1 and the completion
of the Closing, Purchaser shall be a Member in the Company pursuant to the
terms of the Operating Agreement, holding the Percentage Interest in the
Company as set forth opposite its name in Schedule A of the Operating
Agreement.
We disagree with Lu’s contention that Yu’s alleged “failure of consideration” required by
the Purchase Agreement rendered the Operating Agreement (and, necessarily, its arbitration
provision) invalid and unenforceable.
First, “failure of consideration” is distinct from “lack of consideration.” The
former is a defense to a party’s prevailing on a cause of action brought under a contract, but—
unlike the latter—it does not render a contract unenforceable or invalid. See, e.g., Tex. R.
Civ. P. 94 (listing failure of consideration as affirmative defense); Walden v. Affiliated Comput.
Servs., Inc., 97 S.W.3d 303, 320–21 (Tex. App.—Houston [14th Dist.] 2003, pet. denied) (“A
complete failure of consideration constitutes a defense to an action for breach of contract.”);
cf. S.C. Maxwell Fam. P’ship Ltd. v. Kent, 472 S.W.3d 341, 344–45 (Tex. App.—Houston
[1st Dist.] 2015, no pet.) (“[C]onsideration is a necessary requirement for the formation of a
contract. If there is no consideration—that is, no mutuality of obligation—then there is no
contract.”). In contrast to lack of consideration, which “occurs when the contract, at its
inception, does not impose obligations on both parties,” a failure of consideration “occurs when,
because of some supervening cause arising after the contract is formed, the promised
performance fails.” Doskocil Mfg. Co. v. Sang Nguyen, No. 02-16-00382-CV, 2017 WL
2806322, at *6–7 (Tex. App.—Fort Worth June 29, 2017, no pet.) (mem. op.). Both the
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Purchase Agreement and Operating Agreement are supported by consideration, i.e., mutuality of
obligation, in that the former contains mutual promises by the parties to respectively buy and sell
the membership interests and the latter contains mutual promises between the parties (as
members of the Company) regarding their conduct and duties to the Company (such as each
making specified capital contributions). Thus, even if Yu did not pay the consideration required
by the Purchase Agreement or make the capital contribution required by the Operating
Agreement—which are material fact issues we need not reach in this appeal—such non-payment
does not render the agreement invalid.3
Secondly, while the common law recognizes that there can be conditions
precedent to contract formation, see Sharifi v. Steen Auto., LLC, 370 S.W.3d 126, 143–44 (Tex.
App.—Dallas 2012, no pet.), we conclude that Yu’s payment of the $400,000 required by the
Purchase Agreement is not a condition precedent to the formation of the Operating Agreement.
Because of their “harshness in operation, conditions are not favorites of the law,” and in
construing a contract, courts avoid finding forfeiture by condition precedent if another
reasonable reading of the contract is possible. Criswell v. European Crossroads Shopping Ctr.,
Ltd., 792 S.W.2d 945, 948 (Tex. 1990); Great W. Drilling, Ltd. v. Pathfinder Oil & Gas., Inc.,
No. 11-14-00206-CV, 2020 WL 373096, at *8 (Tex. App.—Eastland Jan. 23, 2020, pet. dism’d)
(mem. op.). “If the language of the contract is susceptible to a non-condition precedent
interpretation, we accept that construction and construe the language as a mere covenant.” Great
W. Drilling, 2020 WL 373096, at *8. Furthermore, contract terms that use conditional language
such as “if,” “provided that,” “on condition that,” or similar conditional phrases reflect the
3
Additionally, even if Lu were lodging a true complaint about lack of consideration, such
defect would go to the validity of the agreement as a whole and would have to be decided by an
arbitrator, not the court. See In re Labatt Food Serv., L.P., 279 S.W.3d 640, 647–48 (Tex. 2009).
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parties’ intent to create a condition precedent, whereas the absence of such language is at least
some indication that a provision should be construed as a covenant rather than a condition. See
Criswell, 792 S.W.2d at 948; Schwarz-Jordan, Inc. v. Delisle Constr. Co., 569 S.W.2d 878,
881 (Tex. 1978) (concluding that terms “shall” and “upon approval” were “not those usually
associated with a condition precedent”); see also Chalker Energy Partners, III, LLC v. Le
Norman Operating LLC, 595 S.W.3d 668, 673–74 (Tex. 2020) (noting that whether agreement
creates conditions precedent to formation may be decided as matter of law when terms are
unambiguous, and holding that provision stating parties have no “legal obligation of any kind”
“unless and until” certain events have occurred creates condition precedent).
The Article 2.1 contract provision on which Lu relies—providing that “[a]fter
giving effect to the sale and purchase under Section 2.1 and the completion of the Closing,
Purchaser shall be a Member . . . pursuant to . . . the Operating Agreement”—does not contain
any terms such as “provided that” or “if” that customarily indicate the parties intended to create
a condition. Furthermore, Article 2.1 does not condition the formation of the Operating
Agreement on Yu’s paying consideration at closing but merely recites that after such
performance he will be a member pursuant to the Operating Agreement. The effectiveness of
the Operating Agreement is not made expressly contingent upon Yu making payment (or upon
any other event); rather, the effectiveness of the Operating Agreement is impliedly concurrent
with the immediate effectiveness of the Purchase Agreement, by virtue of the provision
providing that both agreements comprise the parties’ “entire agreement.” It also bears noting
that Article IV of the Operating Agreement provides a remedy for any member’s “fail[ure] to
contribute the full amount of his or her ‘Initial Capital Commitment’”: the “deficiency will be
considered a debt” for which the Company “shall have the right to take legal action against the
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defaulting Member to recover on such debt.”4 The fact that the Operating Agreement provides
a remedy for Yu’s alleged failure to pay his capital commitment or capital contribution of,
presumably, the $400,000 referenced in the Purchase Agreement lends further support to our
conclusion that payment thereof is not a condition precedent to formation of the Operating
Agreement.
As to whether the claims at issue fall within the scope of the arbitration provision,
we conclude that they do. The claims at issue constitute the following: (1) Yu’s request for a
declaratory judgment that he owns 65% of the Company, (2) Yu’s fraud claims stemming from
Lu’s alleged misrepresentation of the Company’s debts and resulting inducement of Yu to lend
funds to the Company and convert the promissory note into the Purchase Agreement, and (3) the
Company’s claims against Lu for breach of fiduciary duty and of the Operating Agreement
arising from his alleged attempt to sell the Property through a brokerage agreement. The
Operating Agreement’s arbitration clause is broad, embracing “all disputes of any kind between
the parties, arising out of or relating in any way to the Agreement” (emphasis added),
terminology that this Court has held to be “extremely broad” and “capable of expansive reach.”
See Kirby, 183 S.W.3d at 898 (quoting Pennzoil Expl. & Prod. Co. v. Ramco Energy Ltd.,
139 F.3d 1061, 1067–68 (5th Cir. 1998)). Such “related to” language, in contrast to narrower
phrases like “arising out of,” extends to “all disputes between the parties having a significant
relationship to the contract regardless of the label attached to the dispute” or that “touch” on
4
The Operating Agreement defines “Initial Capital Commitment” as “the amount the
Member agrees to contribute for his or her Membership Interest” and the related term “Initial
Capital Contribution” as “the amount the member has contributed for his or her Membership
Interest as of the Effective Date.” (Emphases added.) It notes that the amount of each is listed
next to the members’ names on the attached Schedule A. Next to Yu’s name on Schedule A, the
amount of $400,000 is identified as his “Capital Contribution,” but there is no “Capital
Commitment” listed.
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matters covered by the contract containing the arbitration provision. Id. (quoting Pennzoil,
139 F.3d at 1067–68). Given our determination that both the Purchase Agreement and the
Operating Agreement, viewed as one agreement, constitute the contract at issue, it necessarily
follows that the parties’ disputes about the percentage of Yu’s ownership interest in the
Company, if any; Lu’s alleged breach of contractual or fiduciary duties as a member of the
Company; and Lu’s alleged misrepresentations with the intent to induce Yu into loans and
conversion thereof into an ownership interest in the Company are matters that “touch” on and
have a significant relationship to the agreement. This is especially so given our mandate to
resolve any doubts as to an agreement’s scope in favor of arbitration. See In re Poly-America,
262 S.W.3d at 348. We, accordingly, hold that the claims at issue are subject to the arbitration
provision, and the trial court should have granted appellants’ motion to compel mediation and
arbitration.
CONCLUSION
Having concluded that the trial court should have granted appellants’ motion to
compel mediation and arbitration, we reverse the order and remand this cause for further
proceedings consistent with this opinion. See Tex. Civ. Prac. & Rem. Code § 171.021; Tex. R.
App. P. 43.2(d).
__________________________________________
Thomas J. Baker, Justice
Before Justices Goodwin, Baker, and Triana
Reversed and Remanded
Filed: June 8, 2022
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